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Difference Between Equity and Preference Shares June 21 2022Stock Market Education

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Difference Between Equity and Preference Shares

When you begin your investing journey, you come across a variety of financial terms. It is crucial to understand these terms for more informed decision-making and to ensure a smooth investment journey. One such concept is equity shares and preference shares.

A company’s share capital is classified into two types - equity shares and preference shares. Both of these share types have different features and are suitable for investors with different requirements. Therefore, it is important to learn the difference between equity shares and preference shares.

What are Equity Shares?

 

Equity shares are the ordinary shares or regular shares of a company offered to the public usually to raise capital for the expansion of business. When we speak about investing in stocks, we normally refer to equity shares. When you buy equity shares of a company, you become the owner of that company proportional to the value of shares held by you.

 

What are Preference Shares?

 

Preference shares also referred to as preferred stocks are the shares of a company’s stock that enables its holders to receive some additional benefits in terms of dividend sharing compared to equity shares. They enjoy preferential rights to the company’s profits and assets.

 

Equity Shares vs Preference Shares

 

Below-mentioned are the prominent differences between equity shares and preference shares.

Factors

Equity Shares

Preference Shares

Definition

Equity shares are the ordinary shares of the company that represent the part ownership of the shareholder in the company.

Preference shares are the shares that carry a preferential right for the shareholder in the matters of payment of dividend and repayment of capital.

Return

Equity shareholders receive a return in the form of capital appreciation.

Preference shareholders receive a return in the form of regular dividend income.

Dividend Payout

Equity shareholders receive dividends after all of the liabilities have been paid and only after the preference shareholders receive their dividends.

Preference shareholders get the priority to receive dividends before equity shareholders.

Dividend Rate

The rate of dividend for equity shareholders varies depending on the company’s performance and earnings. A company can even decide not to pay any dividend to its equity shareholders for a particular year.

The rate of dividend for preference shareholders is fixed, irrespective of the company’s performance.

Company’s Obligation

The company has no obligation to pay dividends to equity shareholders.

The company is obligated to pay dividends to preferred shareholders.

Mandate to Issue

It is mandatory for all companies to issue equity share capital.

It is not mandatory for every company to issue preference share capital.

Bonus Shares

Equity shareholders are entitled to receive bonus shares from the company against their existing shareholdings.

Preference shareholders do not receive any bonus shares from the company against their existing shareholdings.

Voting Rights

Equity shares offer voting rights.

Preference shares do not offer voting rights.

Participation in Management Decisions

Equity shareholders have voting rights and therefore they have the power to participate in the management decisions.

Preference shareholders are not allowed to participate in the management decisions.

Arrears of Dividend

Equity shareholders have no claim over the arrears of dividends from previous years

Certain types of preference shareholders such as cumulative preference shares can claim arrears of dividends from previous years.

Capitalization

Equity shares have a high chance of over capitalization.

Preference shares have a relatively lower chance of over capitalization.

Types

The different types of equity shares are as follows:

  • Authorised Share Capital
  • Issued Share Capital
  • Paid-up Share Capital
  • Subscribed Share Capital
  • Rights Share
  • Sweat Equity Share
  • Bonus Share

The different types of preference shares are as follows:

  • Cumulative Preference Shares
  • Non-Cumulative Preference Shares
  • Participating Preference Shares
  • Non-Participating Preference Shares
  • Redeemable Preference Shares
  • Non-Redeemable Preference Shares
  • Convertible Preference Shares
  • Non-Convertible Preference Shares

Financing Term

It serves as a means of long term financing.

It serves as a means of medium to long term financing.

Investment Denomination

Equity shares have a lower investment denomination.

Preference shares have a high investment denomination.

Liquidity

Equity shares are highly liquid in nature as they are traded on the stock market. This enables equity shareholders to sell them off effortlessly.

Preference shares are not liquid in nature. However, the company can buy back the shares from the shareholders after a fixed period.

Suitability

Equity shares have a high risk of exposure because of the market’s volatility and company’s performance hence they are ideal for investors with a higher risk appetite.

Preference shares do not possess such threats and are thus considered safer than equity shares. They are ideal for risk-averse investors.

Redemption

Equity shares cannot be redeemed except under a scheme involving a reduction of capital.

Preference shares can be redeemed.

Convertibility

Equity shares cannot be converted.

Preference shares can be converted to equity shares.

Capital Repayment

In the event of the winding-up of the company, equity shares are reimbursed at the end.

In the event of the winding-up of the company, preference shareholders are reimbursed before the equity shareholder.

 

The Bottom Line

Both equity shares and preference shares benefit in different ways. While equity shares offer voting rights and entitle you to participate in the company’s decision-making, preference shares offer an upper hand when it comes to the distribution of dividend.

As an investor, you can choose to invest in equity shares or preference shares depending on your risk-taking ability and financial goals.

To get more updates related to stock market. Indira Securities provides the best trading platform across central India.

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